BIR Ruling [DA-526-04]

October 8, 2004 BIR RULING [DA-526-04] Section 24 (D) (1) BIR Ruling No. 142-96, 045-01, DA-059-04 The Guaranteed Fund for Small & Medium Enterprises 7/F, One Corporate Plaza, 845 Arnaiz Avenue Makati City Attention: Mr. Richard B. Dasal Manager, Litigation and Foreclosure Dept. Gentlemen : This refers to your letter dated January 13, 1999 requesting for a ruling on whether The Guaranteed Fund for Small and Medium Enterprises (GFSME) is subject to the 6% capital gains tax or 7.5% creditable withholding tax on foreclosure sale. It is represented that sometime in 1988, Spouses Pericles and Nancy Mallari (the "Borrowers") were granted a loan by Planters Development Bank ("PDB"); that 85% of the loan was guaranteed by GFSME pursuant to a Guarantee Agreement executed by and between PDB and GFSME; that when the account defaulted GFSME paid PDB the equivalent of 85% of the outstanding balance; that as a consequence thereof, GFSME acquired the 85% interest of PDB in the loan account, while the remaining 15% was retained by PDB; and that subsequently, the real properties which secured the loan were foreclosed by GFSME which became the highest bidder and was issued a Certificate of Sale by the Register of Deeds in the amount of P2,971,500.00. In reply, please be informed that prior to the effectivity of Revenue Regulations (Rev. Regs.) No. 4-99 on April 5, 1999, the law governing was then Section 21(e) of the NIRC of 1977, as amended (now Section 24(D)(1) of the NIRC of 1997) which provides, viz : "(D) Capital Gains from Sale of Real Property . (1) In General . The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, . . ." Revenue Memorandum Order (RMO) No. 6-92, dated January 15, 1992, provides further that: "Considering that in extra judicial foreclosure sales under Act 3135 as amended by Act 4118, the creditor financial institution (bank, finance and insurance companies) is the statutory seller representing the owner-mortgagor of the real property, the said financial institution becomes liable for the payment of the capital gains tax due on such foreclosure sale based on the bid price in the auction sale. The bank, finance and insurance companies, however, may get a reimbursement or recover the capital gains tax paid, if the night of redemption is exercised by the debtor-mortgagor or when the property is sold to any party whatsoever (BIR Ruling No. 006-92). Accordingly, Section 2.2 of RMO No. 29-86, as amended by RMO No. 16-88 and as further amended by RMO 27-89 is therefor hereby amended to read as follows; 2.2. The tax applies not only to ordinary sale transactions but also to pacto de retro sales and other forms of conditional sales, which necessarily includes mortgage, foreclosure sales (judicial and extra-judicial foreclosure sales)." The capital gains tax is imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales such as mortgage foreclosure sales whether it is done judicially or extra-judicially. Since GFSME was the highest bidder, the transfer of the title to the property in its name could be effected only after GFSME pays the 6% capital gains tax and documentary stamp tax both based on the highest bid price. GFSME should present the Certificate of Sale to the proper Revenue District Officer for purposes of the issuance of the certificate authorizing registration (CAR), a requirement for the transfer of title in the Office of the Register of Deeds. The right of redemption of a mortgagor-natural person shall be exercised within a period of one (1) year reckoned from the date the Certificate of Sale issued by the Sheriff is registered with the Registry of Deeds as provided for under Section 6 of Act No. 3135. The capital gains tax herein due shall be paid within thirty (30) days from the lapse of the said period of redemption and shall be based on the highest bid price in accordance with RMO No. 41-91 and Revenue Regulations No. 4-99. On the other hand, the documentary stamp tax due under Section 196 of the Tax Code shall be paid within five (5) days after the close of the month when the right of redemption lapses pursuant to Section 200 of the Tax Code as implemented by Rev. Regs. No. 4-99, as amended by Rev. Regs. No. 6-2001, which shall likewise be based on the highest bid price in accordance with RMO No. 41-91 and Rev. Regs. No. 4-99. cAHIST This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group